A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets

55 Pages Posted: 24 Sep 2020 Last revised: 17 Nov 2020

See all articles by Anirudh Dhawan

Anirudh Dhawan

University of Technology Sydney (UTS)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: November 17, 2020

Abstract

We show that cryptocurrency markets are plagued by pump-and-dump manipulation, with at least 355 cases in seven months. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes and find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants. These manipulation schemes are likely to persist as long as regulators and exchanges turn a blind eye.

Keywords: market manipulation, pump-and-dump, cryptocurrencies, overconfidence, gambling

JEL Classification: G14, G41

Suggested Citation

Dhawan, Anirudh and Putnins, Talis J., A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets (November 17, 2020). Available at SSRN: https://ssrn.com/abstract=3670714 or http://dx.doi.org/10.2139/ssrn.3670714

Anirudh Dhawan

University of Technology Sydney (UTS) ( email )

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Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

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Sydney
Australia
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Stockholm School of Economics, Riga ( email )

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Latvia
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